Friday, January 30, 2015

Colombia holds rate, temporary inflation rise from peso

Colombia's central bank maintained its benchmark intervention rate at 4.5 percent and said it hopes there will only be a temporary rise in inflation from the devaluation of the peso, which will stimulate exports and import-competing businesses and moderate the negative impact on government finances.
The Central Bank of Colombia, which raised its rate by 125 basis points from April through August 2014, added that domestic demand continues to show improving momentum in the context of full capacity utilization while there is some uncertainty about the impact of the declining terms of trade from lower oil prices on aggregate demand.
As an oil exporter, the over 50-percent drop in crude oil prices is having an adverse effect on Colombia's trade balance and public finances, but the central bank said this will partly be offset by the depreciation of the peso and a positive impact on global growth.
The peso started depreciating sharply in late July 2014 and fell 25 percent to 2,459 to the U.S. dollar earlier this month before stabilizing in recent weeks. Today it was trading at 2,451 to the dollar.
After accelerating all year, Colombia's inflation rate stabilized in December, rising to only 3.66 percent from 3.65 percent in November. The central bank targets inflation at a midpoint of 3.0 percent within a tolerance range of plus/minus 1 percentage point.
Colombia's Gross Domestic Product rose by 0.6 percent in the third quarter after contracting by 0.1 percent in the second quarter for annual growth of 4.2 percent, down from 4.3 percent in the second quarter.
Recent data suggest that domestic demand continued to expand in the fourth quarter with growth estimated at 4.0 percent. For 2014 the economy is estimated to grow between 4.5 and 5.0 percent, with the most likely figure of 4.8 percent, above expectations.

The Central Bank of Colombia issued the following statement: (translation by Google)

The Board of the Central Bank at its meeting today decided to keep interest rates at 4.5% intervention. In this decision, the Board took into consideration the following aspects in particular:

Global growth remains weak and uneven. While the recovery in the United States continued and strengthened, growth in the euro area and Japan remains weak. Emerging countries are expanding at a slower pace or do so at historically low rates. This is feasible that in 2015 the average growth of our business partners is less than estimated in previous months.

International oil prices fell sharply in recent months, and its current level is more than 50 percent below mid 2014. To the extent that this phenomenon is due to a sharp increase in oil supply is likely that the net effect on the world economy is positive. However its effects are heterogeneous. While importing countries will benefit, exporters will be adversely affected by the drop in revenues and pressure on public finances and external balances.

By its nature exporting country, the drop in oil prices adversely affects Colombia. The adverse effect on the terms of trade is reflected in a fall in national income, with implications on the trade balance and public finances. These impacts will be partially offset by the depreciation of the peso and the positive effect it could have the fall of oil prices on global growth.

In Colombia, the known data for the fourth quarter of 2014 suggest that domestic demand continued dynamics.With this information, the technical team estimates that during the fourth quarter would have reached a growth of 4%, which second half growth would be 4.1%. While it is lower than in the first half, remains an outstanding performance in the region. With the above expected growth for 2014 has been set between 4.5% and 5%, with 4.8% as the most likely figure.

2015 growth between 2% and 4%, with 3.6% most probable number is projected. This decline reflects a growth in domestic demand is set to lower levels of national income. The sharp drop in oil prices is already reflected in cuts in investment programs in the sector.

At the end of 2014, annual inflation ended at 3.66%, which is within the target range for the year (3% ± 1 pp). The deviation from the central point is mainly explained by the correction of transient falls in some prices and temporary increases in others. In the same month, the average of the four measures of core inflation stood at 3.06%.

Inflation expectations of analysts to one year and which are inferred from the roles of public debt with longer maturities are at the top of the target range. "